On September 30, 2019, Block.one became the most recent startup to settle with the SEC over an initial coin offering ("ICO"). Block.one is a Cayman Islands-based developer of open source blockchain software that aimed to improve blockchain scalability and reduce transaction cost. The company conducted an ICO to raise funds for "administration and operating expenses" and to build a blockchain consulting business that would develop blockchain applications and help other companies develop their business on the blockchain.
As set forth in the SEC's Cease and Desist Order, Block.one conducted its ICO via an entirely automated process accessible from its website from June 2017 to June 2018. Participating purchasers entered into an electronic token purchase agreement and paid for their Block.one tokens by sending Bitcoin to a smart contract put in place by the company. Of the one billion tokens it created, Block.one reserved 100 million tokens as "founders' tokens" for its own account and sold the remaining 900 million tokens in "Dutch" auctions. It sold and distributed 200 million tokens over the first five days of the ICO, and thereafter sold the remaining 700 million tokens into 350 consecutive 23-hour-long sales of two million tokens each. Notably, the tokens contained no restrictions on transfer after distribution and began trading on digital currency exchanges within days of the ICO's commencement.
The SEC noted that Block.one undertook efforts for the purpose of – or which "could reasonably be expected to have the effect of" – conditioning the market for its tokens. Block.one engaged in direct selling efforts, including attending prominent blockchain conferences in the U.S. In connection with one such conference held in New York City, the company advertised its blockchain software on a "large billboard in Times Square," promoted the software in "informal informational sessions," and hosted a "post-conference reception." Block.one's website, white paper, technical paper and other promotional statements were accessible to potential purchasers, including U.S. persons, and the SEC noted that Block.one "promoted its proposed business and ICO to U.S.-based persons" on its website and through posts on social media and message forums.
As a result, the SEC concluded that the ICO satisfied the Howey test and constituted an unregistered securities offering. The SEC reasoned that token purchasers reasonably understood that they would profit from their token purchases if Block.one was able to use the funds raised from the ICO to build a successful enterprise. The SEC further observed that, at the time Block.one commenced the ICO, it had no viable product and "its proposed software was largely conceptual."
Companies considering their own token offerings should take particular note that Block.one's efforts to guard against acquisition of their ERC-20 tokens by non-U.S. persons through contractual clauses and IP address limitations fell short. Here, the SEC observed that U.S.-based IP addresses were blocked from accessing the company's token sale page, but U.S. persons were nonetheless able to view it. Moreover, while Block.one's token purchase agreement included provisions that U.S. persons were prohibited from purchasing tokens and that any such purchase was unlawful and null and void, the company failed to "ascertain from purchasers whether they were in fact U.S.-based persons . . . ." U.S. persons were thus able to purchase tokens directly through the company's website.
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